T. Rowe Price likely reaping the rewards of honesty

December 10, 2003|By JAY HANCOCK

JANUS CAPITAL, which secretly allowed select investors to rapidly trade in and out of its mutual funds while it publicly claimed to discourage the practice, saw $2 billion walk out the door in October, according to Financial Research Corp.

Putnam Investments, accused by state and federal regulators of similar practices, suffered net withdrawals of $2.3 billion that month, FRC says.

The smaller Strong Capital, whose chairman, Richard S. Strong, is accused of hurting clients with rapid trading for his personal benefit, had $321 million in net withdrawals in October, according to FRC, and all three companies continued to see large outflows in November, according to filings and media reports.

T. Rowe Price Associates, scandal free so far, raked in almost $1 billion in October, according to FRC, much of it apparently from its disgraced rivals.

Usually, virtue is its own reward, but sometimes it generates a better return. Price, which has taken in at least $7 billion in new money this year, appears to be collecting the dividends of good governance, honest management and smart stock-and-bond picks.

As some of the nation's best-known mutual fund companies go up in flames, Baltimore-based Price is burnishing an already superior reputation for fair dealing and good returns.

"I'll eat this page" if Price, Vanguard or a half-dozen other well-regarded fund groups get caught up in the current scandals, personal finance sage Jane Bryant Quinn wrote in Newsweek a couple weeks ago.

Morningstar, the respected mutual fund research outfit, has repeatedly mentioned Price as a consumer-friendly alternative to companies accused of skimming profits from small investors. Last month Merrill Lynch upgraded Price's stock to "buy," reasoning that the Baltimore outfit stands to benefit from the skulduggery of its rivals.

"At least we won't cheat you" is not a ringing ad slogan, but that's what seems to be working these days in mutual funds.

Almost every day lately, says Debbie Ferrara, receptionist at Price's downtown investment counter at Calvert and Lombard, people have walked in to dump Janus, Putnam, Strong or other tarnished financial families and buy Price funds.

"Even though they may not see it in their accounts," she said of the pennies on the dollar skimmed through rapid trading at other firms, "they read about it in the papers."

T. Rowe Price Investment Services had $106 billion under management at the end of October, about $26 billion more than it had a year earlier, according to Financial Research Corp. And more than $7 billion of that was new money, although Price says it doesn't track how much came from shamed rivals.

For years, Price has had the kind of governance and trading controls that other firms are talking about implementing or improving.

Price employees are subject to the same restrictions as outside customers: no rapid trading, which saps fund assets with high transaction costs, no "late trading" after daily prices are set and so forth.

Eight out of 11 directors for each of Price's domestic funds, and eight out of 10 for international funds, are independent of the mother company, an arrangement that discourages inbreeding and self-dealing.

When appropriate, Norwitz says, Price has long updated "stale prices" from its international funds so that sharp investors can't make easy money on overnight developments.

Price also levies redemption fees to stop rapid trading on more than a dozen funds.

And, Norwitz says, the firm has banned big investors, including hedge funds such as the ones allegedly gaming Janus and Strong, that try to engage in sly in-and-out trades on funds with no exit fee.

"It's happened many times," he says. "We don't have much of a problem anymore with hedge funds. It's like the house that's harder to break into. The burglar just goes somewhere else."

And if that's not enough, if you buy a Price portfolio and hold it, you might make some money. For the year that ended Sept. 30, 77 percent of Price's funds beat their peers, according to Lipper. Over three years, 82 percent outperformed, and over five years 83 percent surpassed their rivals, Lipper says.

In the three-year period, a fourth of Price's stock funds were in the top 10th of their categories.

For financial service companies, the past few years have been like an FBI entrapment operation or a high-stakes Candid Camera show. Chances for illicit millions were dangled on sticks while e-mail hard drives watched and subpoenas waited. T. Rowe Price appears to have passed.